Tuesday, September 27, 2011

Way back in the 1980's, before he was a washed up politician, Arnold Schwarzenegger made a career out of spouting corny one liners.

In perhaps the greatest (Arnold movie anyway) movie ever made, "the Last Action Hero," Arnold told Claudius he made a "Big Mistake." Right now, Netflix is making a big mistake. The Christian Science Monitor thinks Netflix is creating Qwikster just to sell it. Again, Big Mistake.

America is not ready for streaming, and may remain unready for decades to come. Streaming requires cheap and easy bandwidth, which in turn requires a lot fat, high-capacity connections to the average consumer, already paid for and competing with other connections to offer low cost connectivity. Most internet service providers have usage caps, that impose fairly high fees past certain amounts of downloaded data. Heavy streaming of movies will blow past those caps and make the cost of connecting to the internet very pricey. That's a dubious proposition when people are buying cable packages without ESPN to save $30 to $40 a month.

America is a big, spread out country. Unlike mostly urban places where Netflix has expanded (Canada, Argentina, South Korea), most people in America still live in spread out suburbs. It will take a long time for high speed internet to be built out to those areas, and even longer for the data pipes to be fully paid for, and face competing connectivity offerings. Yes Amazon, and Google, and other people are thinking of offering their own data plans, but let us be realistic. Are they able to cover people in suburban Dallas, Phoenix, Atlanta, Chicago, and St. Louis? Plus everywhere in between?

Then too, Netflix faces extremely high costs in signing content deals for streaming. While Netflix can simply go out and buy DVDs if it has to, and has done so (as has Redbox), for a fixed and limited cost, and rent those discs out, streaming the content requires very pricey arrangements with content providers. Who having rapidly diminished revenue streams from TV sales, DVD sales and rentals, no real bump from Blu-Ray, and not much from global ticket sales or 3-D, are not in the mood to do anything but raise prices or build their own streaming center. [This is short-sighted, and guarantees piracy the way the lack of Itunes in the fragmented, Napster era guaranteed widespread music piracy, but that is another story.] Hollywood needs to make money, and they figure on doing it through streaming one way or another.

Meanwhile, those people wanting high definition video, or 3-D (for those who have it) will find Blu-Ray discs far more friendly. You can stop it and watch when you want, there is no stuttering or jitter on limited bandwidth networks, no pricey bandwidth cap fees, and the family can watch as much as it wants before returning the disc.

Yes, the troubles with the Post Office make the costs of the physical disk market potentially higher, but far lower than the endlessly increasing streaming. In a far-flung nation like the United States, the advantage of delivering entertainment on a physical disk still outweighs that of a network.

Yes this is the old "floppy net" or "sneaker net" way of moving files around, on a physical disk hand-carried to device that can read them. In this case, not computer files but DVD and Blu-Ray discs. This business model still works, generates a lot of cash, and will for quite some time.

Reed Hastings is still living in the mini-dot-com boom. When Facebook and Groupon were valued at billions despite not turning a profit at all, apparently. People don't have the money, to spend on pricey streaming plans. No matter how convenient they are, business-wise, requiring almost no people. Hastings can obviously see, "hey no mailing centers, no people opening and sealing envelopes, very little in the way of employees, hey cost savings." That's diving for nickels and dimes and ignoring dollars on the table. Anyone can open a streaming business, heck why wouldn't content owners go with Hulu, many of which are still partners in the deal, or Amazon, or Apple, or Microsoft, or any number of partners who can give them a better deal?

Meanwhile Netflix already has loyal customers, who have liked and used the DVD by mail rental service because of its cheap price and wide selection. To get into that business requires opening up and training employees to operate mailing centers, regionally. It requires lots of publicity and marketing. Netflix has a lot of expertise running their mailing centers, which are the core of their business. None at all really running streaming which places like Amazon, Apple, Microsoft, and Hulu know a lot better than Netflix.

Sometimes nobody here can play the game, as Casey Stengel said of the hapless Mets. Or, "Big Mistake." Maybe even, "Not to be!"

28 comments:

Rollory
said...

Absolutely correct.

Karl Denninger has been saying similar things about Netflix not being able to keep piggybacking on other people's infrastructure indefinitely. The DVD-by-mail business is the dependable part of their business, which is exactly the opposite of what most people believe.

High speed internet for streaming is in the suburbs, its in the little towns in Wyoming, its already everywhere. So this is not an issue, which unravels the rest of your argument.

Most of the internet usage these days is for streaming video, over half and this isn't going to change.

Certainly, At&T and other carriers have put limits on the amount of band with, recently, but a competitor will keep it unlimited (just as they do with phones).

Netflix has a problem. Red Box has been kicking Netflix's butt on the DVDs and on the other hand their streaming contracts end next year and you'll have more competition in a year from Amazon and hulu among others.

They lost 1 million out of 25 million customers with their change, and I would bet of the remainder a huge percentage dropped the dvd portion because redbox and the local rental store are sufficient.

As a long time Netflix customer, I though I would enjoy their providing on-line streaming much more than it turns out I actually do.

As you noted, there is often a “choppy” quality, that it more annoying than some might think (maybe I’m spoiled by having watched too many DVD’s), and with some content, a noticeably reduced video quality. And, it isn’t as if I simply do not have an adequate wireless router – I purposefully upgraded to a high end router, which was specifically indicated for high-volume usage such as on-line gaming and video streaming.

The convenience of being able to gain immediate access to a specific movie that one wishes to view is arguably a nice feature to have, but one cannot help but notice that quite a bit of Netflix’s catalog is NOT available for streaming. And, the competition for the streaming market is already in place. We’ve long had the ability to view content from out cable provider (Comcast/Xfinity) via their “On-Demand” service – although their movie “rental” costs are certainly excessive. Amazon has also had streamable/short-term downloadable content for some time – and usually at more reasonable prices (but still on a per-item basis). More recently Hulu has also joined the crowded market.

Perhaps Netflix did their “snail mail” DVD rental operation a huge favor in spinning them off into their own entity (Quikster, or whatever they’re calling it). It likely has a better chance of surviving long term, especially as it offers the improved quality available via Blu-Ray.

Yet, I think you missed one aspect of all this that really bothers me – streaming video content to smart-phones and tablets via wireless data services at a time when providers are ditching their “unlimited” data plans, and offering up plans that would typically allow for downloading only a few movies (assuming the higher-cost 3-5 Gbyte/month plans). If one goes beyond the set allocation, one starts to pay a premium cost for per-Gbyte usage (assuming that an additional Gb is only $10, if the movie one wishes to stream from Netflix pushes even 100 Kb over the monthly plan limit, that movie has effectively cost the user $10 to rent (on top of the monthly fee) – and I refused to pay $7 for “On-Demand” movies from Comcast.

And, again, it’s not just Netflix looking to provide on-line content to smart-phone and tablet users. Hulu, Amazon, and Xfinity all provide Apps to encourage users to chose them.

I recall when the iPhone first came out, and the AT&T data plan was 35 Mbyte/month. I found it humerous to read about the high number of dipsh*ts who didn’t realize that trying to download music and video content was going to quickly put them over that limit – and about their whining about get their first months bill for several hundred in additional data fees.

My guess is that the end of unlimited data plans, and the proliferation of apps encouraging people to download video to their phones will soon produce another round of shocked customers who get some big bills – and that might all but kill off Netflix, which has been pushing their iOS and Android app heavily.

Country Lawyer - "High speed internet for streaming is in the suburbs, its in the little towns in Wyoming, its already everywhere. So this is not an issue"

I take it that you haven't actually tried to use it though?

The issue isn't access nor data caps (I agree Whiskey overstates the latter...a bit) It about the quality. A typical movie on DVD is 4-5 Gbytes of data. That's a lot to push out over the net. Thus, providers try to compress it down to around 2 Gbyte. This comes at a cost in picture quality (I notice it especially with Netflix streaming). And, even this compression doesn't completely overcome the issues involved with try to transmit so much data quickly enough for smooth playback.

I've got Xfinitys top plan, their top data modem, and a high-end wireless router, and it still suffers from time to time (say, for example, in th evening when a lot of other people are home and using their Comcast/Xfinity broadband. There are limits which cannot be easily overcome. And, having increasing numbers of people opt to stream movies is only going to make it worse.

Comcast has a bandwidth cap of 250GB/month. Streaming 3 hours of content from Netflix a night for one month comes in at just over 80GB/month, so bandwidth caps aren't currently a problem. Netflix's bigger problem is a Karl Denninger pointed out. They are free riding on the ISPs infrastucture. They also aren't going to get the cheap deals for streaming content that were in place. Starz and Disney saying 'no' to netflix is just the beginning.

Country lawyer - ”I live in the sticks, so I know Whiskey is wrong about access, and never had a picture quality problem and never hit any kind of data limit.”

Ironically, the fact that you don’t live in a metropolitan area likely makes the situation better for you. You end up having the same basic hardware and physical lines that are used for areas with higher population densities (and thus more people trying to transfer more data at the same time).

I think it’s simply a matter of the physical limitations of the networks. A four-lane highway through a big city will suffer chronic congestion issues, whereas the same sized highway running through a small town will not.

I think Whiskey may have over-looked what might be the more critical issue – network over-loading due to the expanded use of video streaming.

I have heard rumors that Comcast (my provider) has surreptitiously instituted measures to deter “heavy” users, such as slowing down the data rates based on measured usage. I’ve never seen any confirmation of this, but I believe that I’ve experienced it. I have noticed that, on occasion, larger downloads seem to slowdown as they progress. And, thinking about it, the issues I’ve had with Netflix movies getting “choppy” seem to happen more towards the end of a movie (just when things are “heating up”, the picture starts to “pixelate”, and the audio sputters and drops out).

While hard data limits (250 Gbyte) may not be “The Issue”, perhaps the larger sizes of movies and the attendant higher rates of data transmission may trigger some “soft limits” that providers have hidden in their system?

Redbox was the killer app for Netflix's over the mail business. Its true that Redbox has a tiny selection compared to Netflix, but it's right there in your hand, and therefore is much more comparable to the old video store rental experience than having to plan your movies out days or weeks in advance. Movie watching is often spur of the moment stuff. Netflix got around that for a while by undercutting video stores to a substantial enough degree such that people would wait to get the movie rather than spending more to see it *now* from the video store or PPV. And so did Netflix slay the video store, for the most part. But Redbox is now slaying Netflix, at least in its old "core" business of mail-order DVD rentals.

I do think that their approach has been understandable yet somewhat hare-brained. Streaming isn't even close to their core business, and it's not clear at all as to what, if any, competitive advantages Netflix has in this area (whereas in the mailer model, they had clear advantages they had built up themselves), plus they have good, well-funded competition who has experience in this area and/or overall web dominance like, say, Amazon. I don't see how Netflix is going to compete successfully with Amazon, Apple and Hulu, really -- they're playing on enemy territory there.

As for the bandwidth issues, the caps are quite high, really, unless you are a totally inveterate movie watcher. Typical 1-2 movies a week would not get you near the caps for most ISPs. And broadband is being built out way into the suburbs now in many places. In the DC area where I live, broadband is ubiquitous 20-30 miles out from downtown, no worries. This will continue to improve somewhat over the coming years as well, I think, although it does depend on where you live. I do agree, though, with slwerner's assessment of the rickety-ness of broadband movie streaming so far -- it's not really the same quality you'd expect, because the band isn't generally broad enough yet throughout the network. Also, I don't understand why someone would want to watch a feature film on an iPhone or an iPad, but that's just me.

I'm not a big home movie watcher, so it doesn't impact me very much at all, but I do think that Netflix has to accept that it had a good thing going for a while, but it's now being outdone and squeezed, and all good things come to an end.

I am a former Netflix employee. I have been present when these issues were discussed at strategy meetings. the problem is that not enough time and effort has been given to studying these issues! You know what goes on at Netflix Headquarters? WE get NAKED!! Ha ha ha thats right bitch! We gess it ON! We goss da bitches and dey be shtraight up HO's mutha fucka!! Dass right bitch! Suck on dat anaconda!! Ight!

It very well could be Werner, that being in the burbs has an advantage over the big city due to traffic on the internet, but that runs counter to Whiskey's position in his post, which was my point.

Streaming does work for the most part and DVDs are over the long haul dead as a business model. So too is Netflix's model, they're dead in the near future unless they reinvent themselves.

The networks themselves have realized that streaming is the way to the future, they offer their shows on streaming with limited commercials and it will be only a matter of time before all the old shows get up and running.

Sell an advertiser a number of users a day to be the sole advertiser for a show someone downloads (cheaper if it is any show versus a particular show) and each viewer gets a message "This show brought to you courtesy of X with limited interruptions. and voila, revenue stream, target advertising (if necessary) no fast forwarding through the advert, no getting lost in the advertising shuffle with everything else, and short enough that most people will stay and watch the ad so they don't miss anything.

Simple.

Look, most people in the under 40 set don't watch shows when they're broadcast and the networks know this and are slowly adapting.

Walmart has a few stand alone grocery stores where I live. Just food, nothing else. The RedBox in the entryway is always being patronized. As I walk by my thought is--They have to make a quick choice. They just want to see something, anything and maybe they have seen it before. Return it tomorrow and it's $1. Hold on to it and you will pay. I wonder how many RedBox patrons hold the DVD more than one or two days.

Anonymous, the day video game companies start inserting diversity and fairness into their video games is the day they stop seeing 500 million dollars in 24 hour kind of profits. There's already a huge liberal bias in the video game industry vis-a-vis the storylines. Modern Warfare 2 couldn't just be about terrorists or even russians, the "ultimate" manipulator/villain behind the scenes was a US general. The super mario princess in Assassin's Creed turned out to be such a cunt she wouldn't even choose an alpha male who killed hundreds of men just to get to her.

Country Lawyer -"High speed internet for streaming is in the suburbs, its in the little towns in Wyoming, its already everywhere."

Not even close. There are vast areas of the USA where high speed internet is unavailable, and likely will not be for some time.

I own recreational property in southern Michigan in a county with a population of roughly 50,000. Outside of folks that reside in the county seat, broadband is generally unavailable. Strictly dial-up through Frontier(FTR). Cellular coverage is very spotty; two bars is the record at my farm. Verizon/ATT/Sprint wireless internet is even spottier. Television options are limited to Dish Network and DirecTV.

In rural America, the scenario I've described is hardly unique. You certainly don't have to be in a wilderness area to have no access to high speed internet.

I have been a fan of netflix for a long time. The problem here is lost revenues to broadcast and cable tv (the content producers). They are trying to recoup those revenues and are trying different things. For streaming the tv show producers are keeping their best stuff on subscriber-only servers. hulu is marketing Hulu-plus.

The bandwidth is not the problem. What is there will continue to grow. But the marketplace is uncertain about how they can maximize their revenues from the delivery of content when the old ad-driven revenue models are failing in broadcast and cable TV.

Ironically, the fact that you don’t live in a metropolitan area likely makes the situation better for you. You end up having the same basic hardware and physical lines that are used for areas with higher population densities (and thus more people trying to transfer more data at the same time).

I think it’s simply a matter of the physical limitations of the networks. A four-lane highway through a big city will suffer chronic congestion issues, whereas the same sized highway running through a small town will not.

The above seems to show a high level of ignorance of what networks modern networks are capable of.

To give you an example of the capacity of fibre-optics consider, e.g., TAT-14 which is one of the major transatlantic internet links. The design capacity of this is 3.2 terabits / sec. What does it take to deliver such throughput? 8 strands of fibre in a cable around 5cm in diameter.

Yet a single such cable at maximum capacity could simultaneously deliver about 2 million different regular quality Netflix streaming signals. This is also under the assumption that no caching of any sort is done (though Netflix in fact does cache).

It's fairly simple to add additional strands of fibre when installing a cable - and such is commonly done as labor costs by far outweigh costs for the cables involved.

Moore's law also applies to fibre-optic cable meaning that the amount of data that the same cable can carry increases as new transmitters are installed on the ends.

I agree with the fact that streaming will be more costly in the long run. Over time, the cost of DVD/Blu-ray decreases. The initial cost is recovered and Netflix will only have to worry about postage.

With streaming, the cost of bandwidth is a constant and not at all comparable to the price of a postage stamp.

More importantly, however, the quality and variety of streaming is poor. Compare the selection for its current streaming line-up with the selection for its DVDs. It's ridiculous. The streaming content is full of crappy movies. There are occasional blockbuster gems, but not enough to keep a customer paying month after month.

Most of the time, the streaming content is something I would watch when I'm bored. It usually would never be something I would queue and wait for. Unless they change their streaming content to include more mainstream, quality films, then they have no case for keeping customers.

Dave the dweeb - ”The above seems to show a high level of ignorance of what networks modern networks are capable of.”

Well, excuse my ignorance of the exact details of what the main fiber optic trunks where capable of (I was aware that they are rather high capacity).

However, what you seem to be forgetting is that the term “network” applies the entire route over which data will be transmitted.

Comcast, my provider, does have an extensive fiber optic network…but, the actual residential connections are based on far lower capacity coaxial lines run from nodes connected to the fiber optic network. If a given node is serving a coaxial line to a high number of residence, then it is likely to be operating much closer to it’s maximum capacity than, for instance, one that is serving far fewer residences in places that Country Lawyer described as “the sticks”. My highway analogy may be far from perfect, but is not completely inaccurate.

I pay extra for Comcast’s PowerBoost, which turns out to be limited to the first 20 Mbytes of a given transfer, so it doesn’t help with video streaming except for the first few minutes. The reality on the ground is that when I’ve actually tried to streaming Netflix content (using either a Blu-Ray player or and Xbox 360), not only is the video quality noticeably poorer than DVD, but it does frequently sputter and pixalate. I guess that’s what I get for not paying tens-of-thousands to have a fiber optic line run to a node in my home, eh, Dave?

And, while I see Country Lawyers point about streaming recent televised content (he notes ‘Person of Interest”, which I recorded using TiVo myself). I have, in fact, used Comcast/Xfinity’s “On-Demand” to do so myself.

But, for me Netflix’ DVD service provided a more unique service. Much of my movie rentals are not of the more recent releases, but of older fare (which Red Box is unlikely to have available), and which Xfinity does not have available in it’s limited “On-Demand” library for pay-per-view.

So, while video streaming may well be “the future”, I still have issues with price (Xfinity or Amazon), availability, and video quality that will keep me using Qwickster as long as they can manage to stay in business.

Qwicksters viability, freed from the impending failure of streaming-only Netflix, will likely depend on people like me, who have similar issues as do I (and probably do not know a the theoretical capacities of every inch of data transfer media in the network, either).

Okay, Dave, you can now go back to telling me what an idiot I am for not knowing that TAT-14 has a design capacity of 3.2 terabit/sec.

I have Time Warner Cable Road Runner Turbo and stream Netflix through my Xbox all the time with VERY few problems, and I live in a rural area. Maybe Im lucky? Anyway my wife and I never go to video stores (used to go to family video quite a bit) and will never use redbox. If there is a new movie we are in the mood to watch we either rent if from Time Warner on demand or rent if from Zune on xbox. We use Zune more, and streaming HD content have not had any problems except like 1 second of lower quality a few time. Well worth it not having to drive 20 minutes to return discs, IMO.

As a side note, I use to have the Disc option with netflix which I personally never even used much. With the lower price for streaming only I dropped the disc, as I was not willing to pay DOUBLE for netflix. Drasticly increasing their prices is whats going to kill them, plus loss of other groups content.

Country Lawyer said..."High speed internet for streaming is in the suburbs, its in the little towns in Wyoming, its already everywhere. So this is not an issue, which unravels the rest of your argument."

oh woah are you totally wrong!Ask any computer savvy person about bandwidth capacity and you'll get an earful. The average consumer is completely ignorant of how limited the capacity really is. Joe Sixpack looks at the Comcast advertisement that promised a 12 Mbps modem so he incorrectly believes he'll be surfing the net at that speed.WRONGThe key phrase here is "up to 12 Mbps" so what that means is Comcast will be "pinching the pipes" and most of the time you'll be running at less than 10% of the advertised speeds.

I agree with Whiskey, the capacity simply is NOT there. However Joe Sixpack ignorantly believes bandwidth is like a buffet dinner where you get to eat all you want. That's just not true.

Country Lawyer said..."Streaming does work for the most part and DVDs are over the long haul dead as a business model."

One of the common arguments the pro-streaming crowd likes to make is that advances in technology will make streaming faster in the future. Well that is technically true but what these people fail to realize is that advances in technology will also increase the capacity of optic discs therefore no amount of advances let it be 10 years from now or 30 years from now, streaming will never deliver greater capacity than a physical storage medium.

For example blu-ray replaced DVD.BDXL will replace blu-rayand BDXL will be replaced by HVD